How to Save an Emergency Fund

How to save for an emergency fund

Unfortunately for many of us, at some point in our lives we find that we are presented with unexpected challenges. This may be financial hardship, health problems, social challenges or otherwise. It may be that one’s own health may decline, a loved one may become ill or someone in the family loses a job. Coping with these types of challenges and overcoming them are often the most difficult times in a person’s life.

Putting aside some emergency money and creating an emergency fund is a great way to care for your future self. So, if you’re wondering how to start an emergency fund, or how much emergency savings you could need, we’ll walk you through the various steps in this guide.

What is an emergency fund?

One of the most important steps to budget for life’s challenges is to create emergency savings. Your emergency fund will comprise a substantial amount of money set aside for unexpected emergencies, which could help circumvent the need for an emergency loan.

It will usually take a number of years and some sacrifices in your day-to-day life to save up enough to suffice as an effective emergency fund. However, it is something that can in the future, pay massive dividends and keep you and your loved ones afloat for some time.

Why do I need an emergency fund?

Navigating your finances can become much more of a challenge when something unexpected happens to you or one of your loved ones. For example, illness can take a severe toll on your health and wellbeing, and it is crucial to keep on top of such possibilities. Proper foresight can help you manage these challenges ahead of time, so you don’t have to worry during stressful times. If you have emergency money, you’ll be freed from the burden of financial concerns.

How much emergency fund should I have?

Your emergency fund should be able to cover your daily expenses for between three and six months. Experts recommend that your emergency fund should range from about £500 per month, to as much as half of your yearly income. It is imperative to think about your income in terms of the number of months it can realistically cover.

How to start an emergency fund

There are several useful ways in which you can increase your savings and get into the habit of saving and planning sensibly. Below we’ve outlined some steps you’ll need to take to create and maintain an emergency fund:

1. Assess your monthly income and expenses

First thing’s first, you’ll need to assess your monthly income and calculate your outgoing expenses. Outgoing expenses include things such as mortgage or rent payments, utility bills, transportation costs, and groceries.

Once you’ve reviewed your monthly income, you should identify areas where you’re able to cut back and put money towards your emergency fund. This could come from unused subscriptions for instance or overspending on dining out.

2. Set realistic goals

You’ll need to start by determining exactly how much you’re wanting to save. As mentioned, a general basis to go off is saving around 3-6 months’ worth of living expenses.

However, everyone’s individual situation is different, and how much you’re wanting and able to save will vary from person to person.

Remember the more money you have in your emergency fund the better, and while it may take you a while to save up, it will be worth it when an unexpected situation arises. So, make sure you’re contributing monthly towards your emergency savings.

Once you’ve taken an in-depth look at your income and outgoings, you’ll be able to tailor an emergency fund plan to your individual situation.

3. Set up your emergency fund

Now it’s time to actually set up your emergency fund. To make sure the money remains untouched until it’s needed, set up a separate savings account to safely store your funds.

When it comes to savings accounts, you should take some time to shop around. For instance, you could opt for one with competitive interest rates to maximise your money and go for an instant-access savings account so you can easily access funds as soon as you need them.

A great way to make sure you stick to your plan is by setting up a standing order, whereby money is transferred into your savings account each month.

And, if you find you have some extra spare money one month, why not pay this in too and give your future self something to thank you for?

4. Different ways you can save money

There are multiple ways you can save for your emergency fund. As mentioned, cutting expenses is perhaps the easiest way to do so. It can be as simple as reducing excess spending or negotiating on your bills.

If you’re hoping to maximise your emergency savings, you’ll have to prioritise your needs and cut back on some of your wants.

You could also get inventive with generating extra income streams such as selling unwanted clothes or items.

Why not start small and begin with saving your coins? Putting away as little as £1 a day, will give you £365 by the time a year is up. We’ve got more handy insights like this in our guide how much can I save in a year?

Whilst saving as much as £50 per month is a lot of money to be able to set aside and not touch until emergencies arise, depending on your salary it is possible to achieve. It's important to remember that by having an emergency fund, you may be able to avoid payday loans altogether.

Where to keep your emergency fund

Rather than stuffing cash under your mattress, you can use several different platforms to keep your emergency find separate from your regular savings and everyday accounts. You could use:

  1. A UK cash ISA that you don’t have easy access to

  2. An automatic saving account that takes additional money from each purchase you make

  3. Open an account with a building trust where you only have access in person.

These methods can help you to ensure that you don’t touch your emergency fund unless you really need to, to avoid slipping into paying for other things with that money.

How to handle immediate financial emergencies

If you are facing financial difficulties that must be addressed immediately, you may consider taking out a short term loan or other short term financial solution. Short term loans are expensive though and cannot serve as a long-term solution for enduring financial troubles. If you are a property owner, you may decide to remortgage your property to release some equity in the medium term.

Start saving for an emergency fund today and do something your future self will thank you for.

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